Over Just 7 Days, Lenovo Wraps Up Two Deals Totaling $5.2 Billion

A computer market in Shanghai. With the PC market in steady decline, Lenovo is aggressively moving into mobile and servers.Credit Aly Song/Reuters

Updated, 10:39 a.m. |
The chief financial officer of the Chinese technology giant Lenovo was scheduled to spend last week rubbing elbows with Hollywood celebrities, corporate chieftains and government leaders in Davos, Switzerland.

Instead, the executive, Wong Wai Ming, a 54-year-old former investment banker, was shuttling between law firm offices in frigid Manhattan, putting together two of the most transformative deals in Lenovo’s 30-year history.

In just seven days, Lenovo announced a $2.3 billion deal to buy IBM’s low-end server business and a $2.9 billion pact to acquire Motorola Mobility from Google. A delicate balancing act was required: Neither the IBM team in Midtown nor the Google contingent downtown could know what was happening in negotiations three and a half miles away.

Each acquisition alone would have been enough to occupy the attention and resources of most other technology giants. But Lenovo is a company in a hurry.

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Lenovo ascended to the top tier of technology companies two years ago, surpassing Hewlett-Packard to become the world’s largest maker of personal computers. But with the PC market in steady decline, Lenovo had already been making drastic moves to ensure its future viability.

“We’re already seeing the demise of the PC market,” said Shahid Khan, a managing partner at the Meridian Advisory Group. “This is foresight on their part.”

In early 2012, Lenovo’s chief executive, Yang Yuanqing, began laying out a plan to branch out into smartphones and other devices in what the company began calling its “PC-plus” strategy.

With the IBM server deal, Lenovo is now positioned to take on Dell and H.P. Even though many companies are transitioning to higher end servers for complex tasks, the x86 servers Lenovo agreed to buy from IBM will remain in demand for years to come, generating steady cash flow.

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Lenovo on Deal for Google’s Motorola

And with the Motorola acquisition, Lenovo will vault into a clear No. 3 position in smartphones, behind Samsung and Apple. Lenovo’s own smartphones are already popular in China, but buying Motorola gives the company a global brand.

“In order to be a global operation, the brand is very, very important,” Mr. Wong said.

In an interview with Fortune on Thursday, the chief executive, Mr. Yang, was blunt: He said he hoped his company would surpass Apple and Samsung.

The voracious acquisition strategy raises questions about whether Lenovo is trying to do too much, too quickly. In the coming months, Lenovo will have to integrate the money-losing Motorola business, as well as its new servers business.

“The biggest risk is whether the executive management has the wherewithal to do a good job in the integration,” said Andrew Costello, a principal at IBB Consulting. “If they don’t, they’ll lose good people as they work to pull it all together.”

The Motorola deal has obvious risks. Its recent phones have not sold as well as Google hoped they would. On Thursday, not 24 hours after the Motorola deal was announced, Google reported that Motorola had lost $384 million in the fourth quarter.

But Lenovo executives emphasize the value of the Motorola brand. And analysts agree that the deal includes other assets that could give Lenovo a better chance of eventually challenging the top two smartphone makers.

“Lenovo now has extra scale in smartphones and a seat near the top table,” said Neil Mawston, an analyst with Strategy Analytics, a research firm.

If the company can successfully integrate Motorola, it could gain considerable advantages.

For one, there would be geographical benefits. Although the company has been pushing to expand its smartphone business internationally, more than 90 percent of its sales are still in China.

Lenovo executives said they would retain both brand names, and in some cases, the two brands might be sold alongside each other.

“We are not restricting Lenovo to China or Motorola to the U.S.,” said Mr. Wong, the chief financial officer. “They are two different brands with different sets of propositions for the customers. The key for us is to sell more devices to the market.”

Although Motorola is not a big player globally, it has distribution relationships with more than 50 mobile carriers, Mr. Wong said.

Lenovo had long been eyeing Motorola. It remained interested even after Google bought Motorola for $12.5 billion in 2012, believing that the smartphone business would come up for sale again.

Though Google had purchased Motorola primarily for its patents, it still had a hardware business to turn around, an effort that ran up hundreds of millions of dollars in losses. By last fall, Larry Page, Google’s chief executive, had grown weary of answering analyst questions about Motorola on quarterly conference calls, according to a person briefed on his thinking, and had resolved to finally put the deal behind him and look for a buyer.

Lenovo’s persistence paid off. Google was not going to sell Motorola to competitors like Microsoft or Samsung, and Lenovo, as the world’s largest PC maker, was an ideal partner.

Around Thanksgiving, Google’s executive chairman, Eric E. Schmidt, called Lenovo’s chief executive and asked if he was still interested in a deal, said a person briefed on the talks.

The two sides began negotiating soon afterward. On one side were Mr. Wong and his advisers at Credit Suisse. On the other were an array of Google executives — among them Mr. Page, Mr. Schmidt and Nikesh Arora, the company’s chief business officer, with the latter two sometimes calling from Davos — and investment bankers from Lazard.

Google saw real benefits in placing its smartphone hardware in the hands of a trusted partner. The prospect that the world’s largest PC maker might become a big proponent of Android, Google’s mobile operating system, was an added benefit.

For Lenovo, the deal instantly made it a preferred hardware producer for the most influential technology company in the world.

“What IBM’s ThinkPad business did for them in the PC era, Motorola will do for them in the post-PC era,” said Mr. Khan of Meridian Advisory.

The simultaneously negotiations with IBM and Google created several memorable moments for negotiators. At one point members of the two deal teams ran into each other at the Midtown offices of the law firm Cleary Gottlieb Steen & Hamilton.

When news leaked that Lenovo and IBM were nearing a deal, Google executives and their advisers suddenly understood why Lenovo had proposed an unusual structure that would allow it to pay off $1.5 billion over time, reducing near-term cash demands.

On the day the IBM deal was announced, Mr. Wong was back at the negotiating table that afternoon, working on the Motorola deal. Days later, he flew to Mountain View, Calif., where he and Mr. Arora hashed out final details over dinner at the Google executive’s home.

The Motorola deal was originally intended to be announced on Friday. But that would have fallen on the Chinese Lunar New Year, when the Hong Kong Stock Exchange is closed. So the wearied deal teams pushed the announcement — and Lenovo’s latest transformation — up by a day.

Correction: February 1, 2014An article on Friday about Lenovo’s deals to buy both Motorola Mobility and IBM’s low-end server business misstated the role of the law firm Cleary Gottlieb Steen & Hamilton. The firm represented Google on its sale of Motorola Mobility to Lenovo. It did not represent Lenovo in that transaction. (Cleary Gottlieb was Lenovo’s legal adviser during its acquisition of IBM’s low-end server business.)

A version of this article appears in print on 01/31/2014, on page B4 of the NewYork edition with the headline: Over Just 7 Days, Lenovo Wraps Up Two Deals Totaling $5.2 Billion.